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Estate Planning

Estate Planning. Estate Planning for Financial Planners “15 things that changed the last 5 years”. 1. Definition of Estate Planning – Meyerowitz

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Estate Planning

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  1. Estate Planning Estate Planning for Financial Planners “15 things that changed the last 5 years” 1

  2. Definition of Estate Planning – Meyerowitz “The arrangement, management and securement and disposition of a person’s estate so that he, his family and other beneficiaries may enjoy and continue to enjoy the maximum from his estate and his assets during his lifetime and after his death, no matter when death may occur.” 2

  3. Topics Selected • Estate Duty – Abatement • Estate Duty – Retirement annuities • Capital Gains Tax – Loan accounts • Variation of Trusts • Trust compliance – SARS Compliance programme • Tax Compliance – Section 74A of the Income Tax Act – to obtain information. • Wills • Transfer Duty • Maintenance • Donations • Policies and marital regimes • Universal Partnerships and spouse • Business Financial Planning – Income tax – Key person and other applications • Business Financial Planning – Estate Duty 3

  4. Estate Duty – Abatement • Pre – January 2010 position • Benefit of abatement often lost • Post – January 2010 position • Deduction of R7 000 000 4

  5. Estate Duty – Deduction • Post-31 December 2009 position • As a result of the 2009 amendment, section 4A(2) provides that when a person was the spouse at the time of death of one or more previously deceased persons, the dutiable amount of the estate of that person must be determined by the deduction from the net value of his or her estate of an amount equal to R3,5 million: • multiplied by two; and • reduced by the amount deducted under section 4A from the net value of the estate of any one of the previously deceased persons. 5

  6. Estate Duty – Deduction • Where a person and his or her spouse die simultaneously, the person of whom the net value of the estate, determined in accordance with s 4, is the smallest must be deemed for the above purposes to have died immediately prior to his or her spouse. • To take advantage of this “transferable abatement” the executor of the estate of the surviving spouse must submit a copy of a return submitted to the Commissioner for the estate of the previously deceased. 6

  7. Example • Princess passed away two years after Prince. Prince, on his death bequeathed R500 000 to his son and the residue to his spouse, Princess. The gross value of Prince’s estate was R5 000 000. Princess’s assets when she passed away was R7 500 000. Calculate the estate duty of both the respective estates. Ignore executor’s fees. 7

  8. Example – 8

  9. Example 9

  10. Note the following: • The estate of Princess is 2 x R3 500 000 less the net estate of R500 000 of Prince. • Stated differently: 2 x R3 500 000 less the unused portion of the abatement = R6 500 000. • It is thus not relevant that the abatement in terms of previous legislation was R1 500 000 or R1 000 000. • Definition of “spouse” 10

  11. Comments • Trust structures • Rationale of legislation • Reason may exist to still use a trust • 10,5 million • Burden of proof – s 23 bis 11

  12. Estate Duty – Retirement Annuities • Pre – January 2009 position death • Post – January 2009 position death 12

  13. Comments • Consistent assumptions for planning • Tax benefits • Estate duty –lump sums and annuities • Capital gains tax • Income Tax • Taxation of retirement fund lump sums • Tax free build up in approved funds • Income source for dependants as opposed to usufruct. (Further reading – Tiny Caroll – Tax Talk April 2012) 13

  14. Example of taxes and cost savings

  15. Capital Gains Tax – Loan Accounts • Waiver of Debt • Donations to trust • Bequest to trusts • Collatio 15

  16. Case law • ITC 1793 • ITC 1835 • Comments by academics 16

  17. Comments • Solutions • Bequeath to spouse or other trust • Bequeath residue • Drafting of Will • Create liquidity in the Trust 17

  18. Variation of Trusts • Risk profiling of trust may have changed • Potgieter v Potgieter (629/2010) [2011] ZASCA 181 • Facts of the case • Argument of children of deceased founder • Arguments of newly appointed capital beneficiaries • Decision of the SCA 18

  19. Importance of SCA Case for Financial Planning • Must my children be part of the trust meeting to “educate them”? • Always leave a door open to amend the deed 19

  20. Trust Substance over form? • FNB v Britz – 20 July 2011 • The legal question • Could the court pierce the veneer of the trust and order that the assets of the trust can be attached by creditors? • What legal and factual circumstances will warrant such a conclusion? 20

  21. Arguments by Married Couple As a businessman and being married in community of property, he was advised to re-arrange his business affairs and personal portfolio of assets. He established a trading trust, which was run as a business, and two trusts to house personal assets. He contended that all times he differentiated between the assets of the trust and his personal assets. Rental paid to the trust to occupy the residence were market related and covered the bond payments. 21

  22. Arguments by Creditor The married couple are effectively in full control of the trust assets. If not for the trust, the couple would have acquired the assets in their own name. The married couple are the sole trustees in terms of the trust deeds. They have an unfettered discretion to deal with trust assets. They are the ultimate beneficiaries of the trust assets. They had the power to remove and appoint trustees. The couple could at any time, in their absolute discretion, transfer the assets to themselves because they were included as capital beneficiaries in terms of the trust deed. The transactions entered into with the trust were simulated. 22

  23. Decision of Court • The trusts were not treated as separate existing entities. • The trusts are the ‘alter ego’ of the couple. • There was a deliberate attempt to rearrange their financial affairs to evade creditors. • The court referred to the Badenhorst and Jordaan cases that held: • One must have regard to the terms of the trust deed, and • consider evidence how the affairs of the trust was conducted. • The clause that allows successive trustees to be appointed is indicative of placing the control of the affairs of the trust in the hands of the married couple. • In terms of the trust deed, the beneficiaries could not challenge the administrative affairs of the trust. It therefore created rights for the beneficiaries, but then does not allow protecting those rights and thus not in accordance with the principle that the trust assets should be administered for the benefit of the beneficiaries. 23

  24. Decision of Court – continued There was no proof of a lease agreement between the married couple and the trust that houses the property, thus ostensibly use the property as their own. By doing so they also not fulfilling their fiduciary duty towards the beneficiaries of the trust. The court found authority for their decision in corporate law with respect to the abuse of a legal entity which leads to the piercing of the corporate veil. It was held that fraud is not a pre-condition and that a court applies a look through approach. Of importance for the court is that the personality of the trust was abused or misused. On the evidence there was no proper paper trial to determine who really paid the bond. It was unclear whether loan accounts were created or whether donations were made to the trust. There was no evidence that the transfer of movable assets actually took place, because proof for the payment of goods and delivery was absent. On the evidence it was clear that the married couple could not convince the court that the de facto control was relinquished. 24

  25. Comments on the Case • An interesting aspect is that the court regarded the interest free loan with no specific terms as indicative of control in the specific circumstances. • Our law will always pay due regard to the substance of the transaction over the form that a transaction is couched in. To arrive at such a conclusion the court will look at the terms of the trust deed as well as the factual circumstances. • Investments in Trust – Risk profiling. 25

  26. Comments on the Case • To conclude that the trust deed has the power to appoint further trustees, or that an interest-free loan is made to the trust, is not sufficient on its own to regard trust assets as that of an estate planner. All the surrounding circumstances must be taken into consideration to avoid the result of the case discussed. It is strongly suggested: • To appoint an independent trustee, although the court did not make much of the fact that the parties were married in community of property and acting as trustees. • Be meticulous in the documentation of transactions with and by the trust, always keeping in mind that the object of the trust is for the benefit of the beneficiaries. 26

  27. Trust Compliance – SARS Compliance Programme 27

  28. Trust – SARS Compliance Programme • Our preliminary sampling exercise has shown that under-declaration of income is an area of concern, where an individual’s declared income is not consistent with their asset base. To date, 467 potential wealthy individuals have been identified where there are discrepancies between their asset base and declared income, and they can expect much closer scrutiny from SARS. 28

  29. Trust – SARS Compliance Programme • Wealthy individuals are also generally linked to a number of trusts and companies, some of which are used as vehicles to channel and hide their assets and income. Most of the wealthy South Africans we have reviewed are linked to more than 10 associated companies on average and 87% of these associated companies and 59% of trusts have outstanding returns. A total of 67% of audits conducted into trusts show serious under-reporting. 29

  30. Trust – SARS Compliance Programme 30

  31. Tax Compliance The Tax Administration Bill (TAB) that will soon become law substantially expands SARS’s information gathering powers. Section74 A In its Strategic Plan 2012/13 - 2016/17 (at p 25) SARS talks of 'becoming data and information rich' and then states: "By increasing and integrating data from multiple sources, SARS will increasingly be able to gain a complete economic understanding of the taxpayer and trader across all tax types and all areas of economic activity. By moving from a transactional to an economic view of the taxpayer and trader, SARS will be able to detect inaccuracies in declarations as well as to identify those who have attempted to stay outside the tax net 31

  32. Wills – Interpretation • Pienaar v Master of the Free State High Court [2011] ZASCA112 (01 June 2011) • The testator (Du Toit) executed a Will in November 2006 (2006 Will) and then later another Will in May 2007 (2007 Will). The deceased was married to Cynthia du Toit but were divorced from her prior to executing both wills mentioned above. • The deceased had two daughters born from a previous marriage and a son, Derick born from the marriage between him and Cynthia. 32

  33. Summary of the provisions of the 2006 and 2007 Wills 33

  34. The Supreme Court of Appeal of South Africa held as follows: Referring to case law, as a general rule Wills (in the absence of a revocation clause) of a testator must be read together and the earlier will are deemed to be revoked as far as they are inconsistent with the later one. Both Wills dealt with the entire estate. There was no revocation clause in the 2007 Will. The 2007 Will was in effect a new “scheme” Relying on Price v The Master 1982 (3) SA 301 (N) it held that if there are two Wills with similar provisions but different in effect, and each Will deal with the entire estate, then they cannot stand together and the later will must be construed as impliedly revoking the earlier. 34

  35. The golden rule of interpretation is to ascertain the wishes of the testator from the language used in the will. The Appeal Court assumed that the testator knew what the term “residue” meant. Therefore the Appeal Court concluded that it was the intention of the testator to include the Sanlam Investment policy in the residue of the estate. The order of the High Court (Bloemfontein) was set aside and the Appeal Court concluded that the 2007 Will impliedly revoked the 2006 Will in so far as it was inconsistent with the 2007 will. 35

  36. Comments on Case Testators must be certain about their understanding of the meaning of the term “residue”. Remember that the residue is paid after estate duty is accounted for. Where a direct investment bequest is made which is dutiable, the estate duty will be paid out of the residue of the estate, leaving the residuary heirs less. If the investment is classified as a policy, in other words have a life insured in terms of the investment contract, the proportionate estate duty payable will be collected from the beneficiary. It is therefore crucially important to determine the nature of the investment and whether the estate duty payable on the investment will be collected from the legatee or the residuary heir! A poorly drafted Last Will and Testament can lead to tremendous hardship and may not reflect the true intention of the testator. To avoid litigation and uncertainty, as in this case, it is recommended to have a revocation clause and prepare a new Will that clearly demonstrates the intention of the testator. 36

  37. Wills and Estate Duty Planning • Assume that you have a scenario where an estate planner wishes to bequeath an amount of R10 000 000 to his spouse and R10 000 000 to his son. • The way you choose to describe these bequests in the last will and testament may have an impact on the final estate duty payable and whether the wishes of the testator can be fulfilled. 37

  38. Assume that the estate planner presents you with the following assets and liabilities of his estate. 38

  39. The estate planner may choose to bequeath an amount of R10 000 000 to his spouse and the residue to his son. It is his intention that the son must also receive an amount of R10 000 000. Alternatively, the estate planner may choose to bequeath an amount of R10 000 000 to his son and the residue to his spouse. • In the first scenario, the son will not receive R10 000 000 as planned by the estate planner. In the latter instance you will note that an estate duty saving of R300 000 can be achieved with the result that both heirs will receive more. 39

  40. Scenario 1 – Bequeath R10 000 000 to his Spouse and residue to Son 40

  41. Calculate residue of Son 41

  42. Scenario 2 – Bequeath R10 000 000 to the Son and the residue to his Spouse 42

  43. Calculate the Residue that the Spouse receives 43

  44. Comment • From the above calculation we can now conclude that the son will indeed receive R10 000 000. The total estate duty payable is also reduced to R1 300 000. • Therefore, bequeathing the residue of the estate to the spouse will ensure that an additional R300 000 as a result of the estate duty savings is available for distribution. Also, the son receives R10 000 000 and not only R9 900 000. 44

  45. Transfer DutySARS Transfer Duty Handbook 45

  46. Maintenance of Surviving Spouses Act • The Maintenance of Surviving Spouses Act determines that in certain circumstances, the surviving spouse holds a claim for maintenance against the estate of the deceased spouse. • Section 2(1) of the Act determines that if the marriage is dissolved by death after the commencement of the Act, the surviving spouse has a claim against the estate of the deceased spouse for the provision of hisreasonable maintenance needs until his death or remarriage in so far as he is unable to provide therefore from his own means or earnings. • The claim arises regardless of the matrimonial property system which operated in the marriage. • However, the claim arises only in so far as the surviving spouse is unable to provide for her reasonable maintenance needs from his own means and earnings. • The surviving spouse shall not, however, have a right of recourse against any person to whom money or property has already been paid. 46

  47. Maintenance of Surviving Spouses Act • The following factors must be taken into account in considering the surviving spouse’s reasonable maintenance needs: • The amount in the deceased estate available for distribution amongst heirs and legatees. • The existing and expected means, earning capacity, financial needs and obligations of the surviving spouse and the subsistence of the marriage. • The standard of living of the surviving spouse during the subsistence of the marriage and his age on the death of the deceased spouse. • The duration of the marriage • The surviving spouse’s age at the time of the deceased’s death • Any other relevant factor. 47

  48. Maintenance Claims against Deceased EstatesSituation where the Spouses are not Divorced • Maintenance of Surviving Spouses Act 27 of 1990. • Section 2(1) • If a marriage is dissolved by death the survivor shall have a claim against the estate of the deceased person for reasonable maintenance until his death or remarriage in so far as the surviving spouse cannot provide from his/her own means and earnings. • Section 2(3)(b) • The spouse shall have the same order of preference as a claim for maintenance of a dependent child of the deceased spouse, and if these claims compete the claims shall be reduced proportionately. • Section 2(3)(d) • The executor of the deceased estate may enter into an agreement with the survivor and the heirs, which includes the creation of the trust in settlement of the claim of the survivor. 48

  49. Oshry NO and another v Feldman [2011] 1 All SA 124 (SCA) • F & O married late in life, both second marriages. O died leaving F with insufficient means in his will. • F claimed under MSSA. The High Court found that payment had to be regular payments and cannot be lump sum. • On appeal SCA found that court a quo erred and that maintenance can be lump sum in terms of the 1998 Maintenance Act. • A claim against the deceased estate for maintenance is deductible for estate duty purposes, provided that it is reasonable. 49

  50. Situation where a Person dies after a Divorce • The Divorce Act is relevant and not the Maintenance of Surviving Spouses Act. • Kruger NO v Goss and another [2010] 1 All SA 422 (SCA) • This case dealt with rehabilitative maintenance, which is usually for a limited period of the date of divorce. • Maintenance does not extend beyond death of maintenance payer unless divorce order states that. • “Of course a spouse is free to agree to bind his/her estate to pay maintenance after death. That is not what occurred in the present case. To allow maintenance claims of the kind encountered here against deceased estates might have all sorts of undesirable consequences.” 50

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